Friday, August 26, 2011

Not long ago, I was talking to a fellow investor about my growing position in Apple.
He told me he felt he waited too long to buy in.
His strategy was to wait until the iconic CEO Steve Jobs steps down, and buy on the pullback. He was sure it would be large.
Then Jobs retired. And the market yawned.
The stock closed down .65%. On the same day, the S&P lost 1.5%.
Since then, Apple is up almost 2%.
So, what can we take from this as investors?
The best leaders surround themselves with top talent. They lead with vision, but it's a vision shared by many others.
Jobs was far from the only great visionary at Apple. I think investors know that. And I think Apple devotees know it, too.
I have great faith that Apple will continue innovating, and that it will continue grabbing up market share with so many of its products.

That investor whose plan it was to buy upon Jobs' retirement had the same plan for Warren Buffett's Berkshire Hathaway (BRK.B).
Berskshire has been beaten down something terrible lately, and it's selling at very attractive prices.
But maybe part of what's depressing that price is the Buffett retirement overhang as he and Charlie Munger advance in their 80s.
Investors' confidence in the transition of power at Berkshire doesn't seem to be as strong as it was in Apple.
Part of that may have to do with the David Sokol/Lubrizol fiasco.
That at least temporarily damaged confidence in Buffett's ability to choose the best lieutenants, and it came at a time when assurance of a good transition of power seems most important to investors.

Buffett has always been quiet about the company's fate after he leaves Berkshire. But we'd be foolish to believe that he is not planning for it.
Berkshire's next leader won't be "the next Buffett."
But Tim Cook is not "the next Steve Jobs," either. Yet, Apple will march on undeterred.
I expect Berkshire to do the same. And since it's now selling at just about book value -- historic lows -- there may be no better time than to reflect on the Apple story and buy a piece of post-Buffett Berkshire now.

Tuesday, August 16, 2011

OK, it's not quite as simple as the headline might suggest. But there's something to that whole idea of buying boring companies.
I'd had my eye on Kennametal (KMT), an industrial tool maker based in Latrobe, Pa, the town once famous for its green-bottled and often skunky Rolling Rock beer.
I learned about this company through a Motley Fool investing newsletter, which recommended it back in the spring.

Kennametal makes metalworking tools and drill bits for mining operations.
It also makes tools that help make medical devices such as heart valves and replacement joints. And it makes the metal in machines that cut your receipts at gas pumps and registers.
I liked the story. It's a bit of a turnaround play. Despite being one of the leaders in its industry, Kennametal struggled through 2009 and into 2010. Earnings per share had fallen from a pre-2008 crash $2.49 to a meager 22 cents It put together a company restructuring plan to get itself back to better profitability.
It's come along well.

Late last month, it reported a strong quarter. Earnings rang in at $1.11 per share. Same quarter last year, it earned just 61 cents a share. That's nice earning growth.
Revenue growth was impressive too. That's important for a story like this. I don't want to invest in a company just because it slashed its workforce to pad earnings when times are still tough. I want it to be growing into the future.
Kennametal's sales were up 28 percent over last year.
The company expects that growth to continue into 2012.
That fits the bill.

Yet, the reaction to its recent earnings report was tepid at best. In fact, the stock dropped from about $42 to under $39 over the next couple days.
I guess you'll have that with boring stocks like Kennametal.
I took the opportunity to make my first buy.
Of course, all hell broke loose in the markets very shortly after.
I used that as an opportunity to add shares and reduce my average cost when the stock dropped to around $32. With my average cost, I'm buying a pretty good company at a multiple of 13.

But there's more to Kennametal's draw, at least for me.
It's a company right here in my home state of Pa. It's from a town that produced one of the state's most iconic products since Prohibition. (Rolling Rock is now a Labatt product.)
I'd also worked in a metal factory in my younger days. Not quite the type of work Kennametal does, but still, there's something nice about owning companies that produce goods like that.

Thursday, August 11, 2011

One thing I've come to regret during this pullback is not having enough cash on hand to buy.
Stocks went on sale, and my wallet was thin.
This was the first time I've experienced that.
I started buying stocks in 2008, and I waded in slowly through the next year as I researched and found companies I wanted to own.
Every time I funded my account, I already had something I wanted to buy.
With a bull market running through the next two years, I never saw the need to keep a lot of cash in my account. It seemed to always be better off invested.
Now, I'm paying the price.

I managed to sneak a question about cash reserves to the Motley Fool staff during one of the website's live chats this week.
MF writer Morgan Housel said he had the same dilemma when the market crashed in 2008. Stocks were cheap, and he didn't have enough money on hand to do much buying.
Since then, he's shot to build up a cash reserve he can employ when plunges happen.
He said he tries to keep somewhere in the area of 15 % of his overall portfolio in cash for times like these.

When I looked back at what I'd had on hand when the big hits started coming this summer, it was just shy of 5 %.
That went quickly. Too quick. Now, I'm like a kid at a candy counter with no change in his pockets. I've dug down, and pulled out lint and white pocket liners.
Sure, I can scare up a little more by pilfering my savings account. But I don't like to take much out of there. And frankly, it's a bad habit to run your savings too low in order to fund investments that can lose money this quickly.

Where did I go wrong on this one?
My big problem is that I'm always like a kid in the candy store with stocks. Give me a $1 and I'll buy a Mounds and an Almond Joy.
Give me two, and I'll buy both and a buck's worth of Swedish Fish.
I've basically bought stocks pronto every time I've set aside money to do so.
That leaves me with little cash in my brokerage account. It never occurred to me that there may be a better way because it never seemed to be a problem.
While I'm not entirely convinced there is, this plunge has me thinking about it.
Keeping cash on hand for price dips allows you to buy more at those lower levels.
I could have doubled down on a handful of stocks at at least 20 percent off my first buy.
But sometimes, you miss out on opportunities by not buying as you go along, too. Apple, for instance, was selling for $315 in June. Even after the recent price slaughter, it's pulled back to only $364.

Still, I'm willing to try this as an experiment over the coming years.
For now, I plan to funnel my money into stocks while I believe they are underpriced. But once the bull's gotten up and is off with a good head of steam, I'm going to look to build up that cash balance to at least 10 percent.

Tuesday, August 9, 2011

Catching up on my trading, I put Monday's continuing decline to use to snap up my second third of agricultural products maker Mosaic (MOS) as well as a second piece of Kennametal (KMT), which makes industrial drill bits and other tool parts.
I liked both of these companies 10 or even 20 percent higher, and had been looking for an entrance. The dip provided a nice one.

I had considered also opening a position in National-Oilwell Varco (NOV), but didn't get to it Monday. With Tuesday's fast recovery, the stock shot up quickly. So, I'm going to hold off right now and see where it stands later in the day and in coming days.

**UPDATE ** - When the market crashed immediately after the Fed announcement, I did buy that piece of NOV after all. Not only that, but I watched it tick up to a better-than-10-percent run on the day. A real victory, if only a momentary one.

I also considered adding to Ford (F) below $10, or opening a position in auto-parts maker Borg-Warner (BWA), but did not feel I had enough money to make one of those moves and the NOV buy. So, they were put on hold.
I still have some ammo left. We'll see what the coming days bring us.

Monday, August 8, 2011

My father always liked investing in top-notch audio and video gear. In the early 1980s, he laid down $400 for a VCR. That's about $1,100 in today's money. And that was on a pressman's salary.
When I think back to that audio and video gear, I can remember the words "Dolby Sound" appearing on quite a few of them.
It was a mark of quality, regardless of brand or device type.
Over the years, Dolby (DLB) has figured out how to get its technology into just about everything -- cassette decks, CD players, movies, home theater systems ... You name it.
That's why I was willing to give the company a shot after two weak quarters sent its stock price tumbling from a high near $70 to just over $40.
The underlying concern with the company was less about what it was earning right now, and more about what it might be earning in the future. Dolby made a lot of money on PCs. Its technology was built in to operating system and optical drives.
The transition from desktops and laptops to smartphones and tablets presents the company with a new challenge.
Buying the stock this spring was a vote of confidence in Dolby. I believed its technology was still seen as a necessity by most quality tech makers, and that because of that, Dolby would navigate its way through yet another technological change.

And then the curveball
That confidence was shaken last week when the company dropped a shocker on investors during its conference call. It revealed that it's not in the current version of Windows 8 that's still in development. It had long been included in the previous Windows versions.
Wall Street took notice. There were immediate downgrades. The stock, already down over the past few months, plummeted another 18%.
So what's an individual Dolby investor to think?
On one hand, Windows 8 will represent only a small piece of Dolby's market. And there's a chance Dolby sound will be included on the final version, which is the only one that counts. The company is also working with equipment manufacturers to get the technology directly on the computers and other gadgets.
So, this may be much ado about nothing, and since Dolby's full quarter actually beat analysts' expectations, maybe things are not looking bad. Maybe, at a price-to-earnings ratio under 12, Dolby is a screaming buy.
On the other hand, the fact that Microsoft (MSFT) has not included Dolby on the operating system so far raises a big question: Do tech makers still consider Dolby necessary to their products?
If not, the company has much more to overcome than I'd previously bargained for.

Where to go from here?
This has left me at a crossroads with the stock.
I have four options:

Sell at a 33% loss and look for better opportunities.

Sell out of part of my position, but still give DLB a chance.

Stand pat and don't overreact to what might turn out to be non-news when all's said and done.

Treat the plunge as an overreaction and buy more DLB.

I have not decided a course of action, but I'm leaning toward option No. 2, and getting out of part of my position as a way to hedge my bets. This is a blow that may take some time to recover from. But manufacturers, Including Apple (AAPL) and still including Dolby products on their systems.
I'll be thinking more and watching the price movements and news over the next few days to help me decide.

Thursday, August 4, 2011

Maybe the last thing you really want to do today is read about stocks.
This has been some mean stretch for investors.
Thursday's bloodbath was enough to turn an investor's stomach. Maybe you were smart and tuned out.
But don't tune out for too long. Because history shows us that when the mass of investors pull out and tune out is exactly the time we should be shopping for our next buys.
I had two things that served as my saving grace Thursday, which appears to be one of the 20 biggest single-day drops in Dow history, no matter how you measure it.
The first was Teradata, the best performer in my portfolio. On a day when the Nasdaq plunged by more than 5%, Teradata held its ground. The data warehousing and analysis company beat expectations again this quarter. I expect it to move ever higher when sanity returns.
The second part of that saving grace was that I bought Thursday. That's right. I grabbed a piece of Mosaic in the morning, when the stock was down by some 8 %.
Some might think that was foolish on a day when investors were running for cover en masse. Only time will tell.
But here are a few things we can all be sure of:

When such big hits will happen cannot be predicted.

How large any particular hit will be cannot be predicted.

When the market "bottoms" cannot be predicted.

The only reliable way for investors to make money in this scary market is to buy. Buy when it takes a big hit. Buy if it takes another.
Buy in chunks and try to keep money on the sidelines for the next opportunity.

I've been investing only for a few years. But I've been investing long enough to have learned how well this can work.
I started investing in 2008. The market crash started opening up opportunities, and they kept right on coming. I bought General Electric (GE) when it hit $11, and then when it hit $8, and again when it neared $6. I sold when the stock was between $14 and $15 and locked in some nice profits.
I did the same with Petrobras (PBR) and Yanzhou Coal (YZC), which I'd bought for under $5 a share and sold near $20.
I hit doubles with at least one of the chunks of almost every stock I bought over my first year of investing. I still regret not buying Apple (AAPL) under $100.
Had I waited until things seemed "safe," I would have stayed out until probably sometime in the second half of 2009. But by that time, there wasn't all that much upside left to the market's recovery.

Take a look at the market's recovery from the March lows that year until the year end.
If you kept buying, you would have earned that 50-plus percent gain on at least one of your buys, and slightly smaller gains on those you purchased on either side of the bottom.
Now take a look at how you would have done if you steered clear until late 2009.
No so impressive, is it? Nine percent over two years.
Not impressive at all, actually.

It's hard to look at charts like these (or the one in this previous blog) and come away with any other conclusion than this:
The real money is made by stepping into the market when everyone else seems to be running for cover.

Monday, August 1, 2011

There are several changes here from my update one month ago. Here's a quick rundown of the moves:

Bought more Apple after yet another tremendous quarter. That's now my largest holding, even though it was not in my portfolio just four months ago. You can read more about that here.

In related trades, sold my shares of touch-pad maker Synaptics, and lightened up on Adobe, seeing them as competitors, to varying degrees, of Apple. You can read more about that here.

Halved my holdings in Noble, since I bought this deep-water driller several months before the Gulf oil spill and no longer like the growth possibilities in the area, at least not for now. So, I'm expecting slower growth from the company and figure my money can be better invested elsewhere.

Opened positions in two new companies.

Before I get to my new positions, have a look at the complete portfolio. (For a larger image, click on the portfolio or right-click and open it in a new tab.)

My two new adds are Balchem and Kennametal. I learned about both of these companies through a Motley Fool newsletter service. While I don't buy everything it recommends, I do like these picks. Balchem makes nutrients and other additives for animal feed, drugs, supplements and food we eat.
Kennametal makes industrial tools, like drill bits for mining.
I'll be writing more on what I like about these companies in upcoming blogs.

I also added to my holdings of Dolby, another subject I'll be sharing my thoughts on soon.

The Blogger

Reporter by day. Stock portfolio manager by night. I've been at it since just before the 2008 crash. I'm still learning everyday.
This blog is where I share my triumphs and my errors. Feel free to share some of yours.